“The possibility for gains trade is due to the fact that different countries face different resource endowments, production costs and geographical locations.” Interpret and expand with examples.

What will be an ideal response?

This statement is correct. Each country has a different combination of resources (i.e., land and mineral deposits), skilled and unskilled labor forces, capital development, and geographical advantage or disadvantage (i.e., being near a waterway or ocean). This means that one country may have a very different cost of production of a certain good than another. Gains from trade are possible when each country specializes in the goods in which it has the lowest opportunity cost relative to other countries. By specializing in production, all countries gain from having a greater supply of goods than they would be able to achieve domestically.
For example, China has a large manufacturing industry ranging from textiles to toys. China has an advantage in producing these goods because it has a large unskilled workforce that can produce these goods at a lower price relative to other countries. More industrialized countries such as the United States and European countries have shifted their economies from being more manufacturing-based to producing services. This occurred because these countries have large endowments in skilled labor, which means they have a higher level of productivity and can produce services like financial advice and legal services at a lower relative cost. Central and South American countries have a comparative advantage in producing certain agricultural products such as fruits and coffee. They have this advantage due to the fact that they are less developed, so there is a lower opportunity cost to using land for agriculture and they are naturally endowed with the proper climate and terrain to produce these products.